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Tens of thousands of people came to Athens Syntagma Square to hear Greek Prime Minister Alexis Tsipras call for a 'No' vote in the upcoming Greek austerity referendum, July 4, 2015. Debets/Press Association. All rights reserved. I

A call on the IMF: Since
July 2015, the IMF has called on European governments to forgive a significant
chunk of the Greek government’s unrepayable debt. Why doesn’t the IMF itself
forgive the debt owed to it by Greece? The IMF, in concert with the European
Union, repeatedly and arrogantly dismissed sound economic advice and norms. The
result: the Greek economy has suffered lasting damage and, even more
grievously, Greek citizens have lost their voice in charting their own
country’s economic future. Since European authorities are busy rewriting
history, the IMF must forgive Greek debt to show that someone is accountable to
the people of Greece.

In the latest Article IV report
on Greece, the International Monetary Fund (IMF) begins its economic
health check with this dramatic but, by now, depressingly familiar chart.

Nine years have passed
since Greece’s crisis began in October 2009. Since then, Greek GDP fell by 25
percent and is stuck at that level. More than a third of Greeks live below the
poverty line; young and working-age people are at especially high risk of
poverty. Young Greeks, facing uncertain job prospects at less than living wages,
continue to leave the
country in large numbers.

The United States also experienced
a 25 percent decline in GDP during its Great Depression, but (as the IMF’s
chart shows) by the seventh year after the start of that crisis, GDP was back
to where it began. Other than perhaps Venezuela, Greece has experienced the
most extraordinary economic devastation in a country not plagued by civil or
external war. And unlike the mindlessly self-inflicted Venezuelan disaster, the
Greek devastation has occurred under the tutelage of the IMF, European
governments, and the European Central Bank (ECB). Other than perhaps Venezuela, Greece has experienced the
most extraordinary economic devastation in a country not plagued by civil or
external war.

Technically, on August
20, Greece “exited” from its financial bailout program that the IMF and
European Institutions (EIs) have administered since May 2010. A chorus of
European leaders rushed to “pat themselves on their
backs.” Donald Tusk, president of the European Council, was first,
with an ode to “European solidarity.” German
finance minister Olaf Scholz described
the “rescue of Greece” as a “measure of European solidarity.” Olli Rehn,
European economic and monetary affairs commissioner through much of the Greek
program, wrote, “It is time to note
#Europe has stood by Greece.”

Such self-congratulatory
missives – implying a fanciful picture of Greek economic achievement aided by the
sagacity of European authorities – were utterly discordant with the widely
perceived reality. As philosopher Ludwig Wittgenstein may have said, European
leaders were trying to bewitch the mind by means of language. The political theorist
Hannah Arendt would have understood the phenomenon. More than a half century
ago, she wrote, “Truth and politics are on rather bad terms with each other,
and no one, as far as I know, has ever counted truthfulness among the political
virtues.” In this age when “truth is not truth,” the duplicitous
language used by European leaders should not be a surprise.

The real problem is with
the word “exit.” The IMF’s report makes clear that the Greek government’s
policies and actions will continue to be tightly reviewed by the European Institutions:

“Nonetheless,
given the high European official sector exposure to Greece (close to €260
billion), Greece will engage in ‘enhanced’ post-program monitoring (PPM) with
the EIs, which entails higher frequency (quarterly) engagement and monitoring
of specific policies than in the other Euro Area post-program countries.”

Translating this polite
bureaucratic language, Greeks owe the EIs €260 billion ­– and so will remain
beholden to them. The EIs have promised to forgive some part of the debt, but the
slow drip of forgiveness will require Greek governments to act as the EIs
specify. Already on August 22, a Greek news website
wrote that the “post-programme era” would begin with an immediate
visit by the “institutions” to discuss Greece’s budget for 2019. Greece is
technically exiting the bailout program, but there is no true exit: Greece’s parliament
will have limited economic decision-making authority for years, or perhaps
decades.

“I
am just amazed that this continues”

Greece became a member
of the European Economic Community (forerunner of the European Union) in January
1981. The European Commission had advised against rushing Greece into the
Community. The Commission’s concern was that once Greece complied with the requirement
of lower trade tariffs, Greek producers would not be able to compete against
foreign competition. But French president Valéry Giscard d’Estaing insisted – some
say, in an effort to protect Greece’s fledgling democracy.

The Greek economy was,
indeed, uncompetitive. The government twice borrowed from the European
Community; twice it did not live up to the commitments under which it had
borrowed. But worse, Prime Minister Andreas Papandreou fostered a deeply
corrupt political system, which sucked in all political parties.

Greece clearly did not
belong in the eurozone. But German chancellor Gerhard Schröder, in a bid to
prove his pro-European credentials, waved Greece into the euro area, while
other senior European officials cheered the enlargement of the single-currency
zone as a marker of its success. Greece became a member of the eurozone on
January 1, 2001, and a December 2004 audit of Greek fiscal accounts revealed
that Greece’s fiscal deficit around the time of the euro entry decision was, in
fact, significantly higher than reported. The Greek government had fudged its
accounts to qualify for entry. Joaquín Almunia, the
European economic and monetary affairs commissioner, said he had not known.
Greece’s euro entry decision, he said, relied on the “best available evidence”
at the time. But he acknowledged, “We
had a very sad experience in the case of Greece.”

The 2004–2007 global
economic bubble kept Greece and other eurozone periphery economies afloat.
Indeed, Greece seemed to have escaped the brunt of the global financial crisis.
On July 20, 2009, the
IMF issued a cautiously optimistic Article IV report on Greece. The aftershocks
of the collapse of Lehman Brothers in September 2008 were still being felt
worldwide. But Greek banks, the IMF concluded, were stable; they had adequate
reserves to deal with more adversities. While the IMF made its customary pitch
for more fiscal belt-tightening, it complimented the government for “welcome”
measures to rein in its budget deficit.

When the IMF’s executive
directors (representing the shareholding member countries) met to discuss the
report on July 24, a cryptic sentence about the poor quality of Greek
statistics worried Sweden’s Jens Henriksson. “I am just amazed that this
continues,” he said. Were the Greeks incompetent, he asked, or were they
intentionally making up the numbers? It was a closed-door meeting, and the
remarks would not become public for another five years. The IMF economist in
charge of Greece, Bob Traa, responded frankly. Incompetence, he said, was not
the problem. Greece’s leaders consciously chose to mislead, Traa explained,
because if they revealed the severe problems they faced, they would invite
unwelcome criticism. By doctoring the numbers, they hoped to “control the
message.”

On October 4, George
Papandreou, son of Andreas Papandreou, was elected Greek prime minister.
Despite the IMF’s rosy depiction, corruption was still rampant, and life was
hard, especially for the young. At an election rally some days earlier, a thirty-year-old
unemployed accountant had forlornly said, “we vote for hope.” And in his moment
of triumph, Papandreou bravely declared, “We are a
country with great potential.” He promised “deep changes” to create a “just and
equal” society.

Starting
October 8, government officials announced that the budget deficit for the year
would not be 6 percent, as previously anticipated. The new estimate steadily climbed
to 12.5 percent. Almunia again bore the brunt of the embarrassment. He meekly
said, “These serious discrepancies will require an open and deep investigation
of what has happened.” Jean-Claude Juncker, head of the Eurogroup (the group of
eurozone finance ministers), who also knew of the brewing problems, threw in
more meaningless words: “The game is over, we need serious statistics.”

Greek
leaders had delivered to their people a corrupt, bankrupt, and dispirited nation,
while European and IMF officials had little to offer except an occasional word
of cheer. For their acts of omission and commission, together they now faced a
rushing financial crisis.

“Not
on the table”

German chancellor Angela
Merkel took note some months later, in December 2009, commenting, “We have
problem children in Europe.” But she was politically hamstrung. She understood
that German taxpayers would punish her if she lent Greece a helping hand. So,
she put her faith in Greece miraculously solving its own problems. The Greek
crisis steadily intensified.

From the start, it was
clear that the Greek government’s creditors needed to bear substantial losses.
In public, the Wall Street Journal’seditorsadvocated imposing losses on creditors. In two editorials in April
2010, they argued that the alternative would be extreme fiscal austerity, which
the Greek economy would not be able to bear. Nearly simultaneously, in
closed-door meetings of the US Federal Reserve’s monetary decision-making
body, the Federal Open Market Committee (FOMC), economists spelt out the logic.
If the Greek government miraculously implemented
the extraordinary tax increases and spending cuts that European governments and
the IMF were proposing, businesses and households would contract rapidly and
GDP would fall sharply. Since tax revenues would fall along with GDP, the
budget deficit would not shrink as much as anticipated.
Because of the decline in GDP and the smaller-than-expected deficit
reduc­tion, the debt burden ­– the debt-to-GDP ratio – would rise from its
already high level. Interest rates paid by the government would quickly go up. The
economists at the FOMC concluded that although European authorities considered “debt
restructuring” (a euphemism for forcing losses on creditors) to be “unthinkable,”
the austerity-centered financial bailout would soon enough make restructuring
“unavoidable.”

Olivier Blanchard, the IMF’s chief economist,
understood the logic only too well. In a confidential memo to his bosses, he
laid out the numbers that had led the FOMC economists to conclude that a debt
restructuring was “unavoidable.” The Greek government could repay its debt
through austerity, he wrote, but not with a “high degree of probability.” In
essence, the staff report said that only under some hopelessly optimistic
scenarios could the government honor its debts. At the Executive Board meeting
on May 9, 2010, René Weber, the IMF’s executive director from Switzerland, who was
not privy to Blanchard’s memo, made a powerful case for immediate
restructuring. Chris Legg, the Australian executive director, reminded the Board
that the IMF had gone through a painful experience with Argentina not long before.
The delay in restructuring then, he pointed out, had only made the problem
worse, which the IMF itself later recognized in one of its customary mea culpas. Other executive directors,
including India’s Arvind Virmani, chimed in.

To all of the executive
directors calling for immediate restructuring of Greek debt, Poul Thomsen, the
IMF’s man in charge of the bailout program, had a simple answer. It was “not on
the table,” he said, because European authorities, supported by US Treasury
Secretary Timothy Geithner, claimed that any restructuring initiative would
lead to a Lehman-like panic and global financial meltdown. In the eurozone, the
ECB was the most vociferous proponent of this view. Neither contemporary
assessments – such as those by the Wall
Street Journal and FOMC economists – nor later academic studies supported
this dire prediction of financial contagion. Yet, the view took hold. As Lee
Buchheit, the veteran sovereign debt attorney, trenchantly said, the ECB had
“the mentality of a six-year-old boy who gets it into his head that demons lurk
just beyond his bedcovers in a dark bedroom. Panic grows with every hour.” His
description applied to all the politicians and technocrats who mattered.

Switzerland’s Weber
tried one more time. Didn’t the IMF’s rules, instituted after the Argentina
debacle, require that a potential borrower’s debt be restructured if the
government’s debt was not repayable with “a high degree of probability?” Since
IMF staff refused to say that the Greek government would repay debt with high
probability, why was there even a choice? IMF management had changed the rules
to allow the Greek program to go ahead. The management invoked the specter of
contagion, for which, a dejected Weber pointed out, it had offered no evidence.
The IMF’s first deputy managing director, John Lipsky, was annoyed by this
point. Even a discussion of debt restructuring, he said, could cause market
tremors. There was “no Plan B,” he said.

In Athens, a few days
earlier, Greek legislators had made a bid to soften
the austerity being required of the Greek population, to “make the wage cuts
less steep or find less painful alternatives.” As angry protestors outside the
parliament building chanted, “Let the Whorehouse Burn,” Finance Minister George
Papaconstantinou told the parliamentarians inside that it was too late to make any
changes. “It was a take-it-or-leave-it proposition,”
he said. As angry
protestors outside the parliament building chanted, “Let the Whorehouse Burn,”
Finance Minister George Papaconstantinou told the parliamentarians inside that
it was too late to make any changes.

With that, the
austerity-laden Greek program went ahead. Briefly, IMF’s Thomsen and German finance
minister Wolfgang Schäuble lauded the Greek government for its brave efforts to
fulfill the program’s requirements. But the arithmetic of austerity quickly and
ferociously bit in. Exactly as predicted, the Greek economic collapse began.

The
Greek citizens’ rebellion

Alongside the economic
implosion between 2011 and 2014, Greek democracy was utterly eviscerated. In
2011, George Papandreou proposed holding a referendum to ask Greek citizens if
they were willing to bear the unbearable austerity. Papandreou was hauled up
before Merkel and French president Nicholas Sarkozy, who told him that if he
went ahead, he risked stoppage of the bailout funds. Papandreou resigned. He
was replaced by the unelected, technocratic Lucas Papademos, a former ECB vice
president, who enforced the austerity measures demanded by the creditors and
finally undertook, in March 2012, the necessary restructuring of privately held
Greek debt. Private creditors took historically large losses. But this was not
enough. European authorities were forced to provide relief on official debt,
which they did in driblets. Every several months, they lowered the interest
rates on their loans and extended the duration of repayment. Yet, the Greek government
barely stayed afloat, and kept borrowing from its official creditors to repay
them.

As elections approached
in May 2012, the economy was in chaotic decline. The unemployment rate was surging
toward 25 percent. In their desperate search for alternatives to their crushing
economic pain, Greek citizens gave Syriza, the anti-austerity and, until then,
fringe political party, 17 percent of the vote. Alexis Tsipras, Syriza’s thirty-seven-year-old
leader, called for an end to “barbaric austerity.”

Tsipras’s rhetoric was
not welcome in Berlin or Frankfurt. Jörg Asmussen, until recently a minister in
Merkel’s government and now an ECB Governing Council member, spoke as a German
politician rather than as a neutral central banker. He had a tough message for
Tsipras: “Greece needs to be aware that there is no alternative to the agreed
reform programme if it wants to remain a member of the eurozone.” The bullying
tone adopted by Asmussen and others encouraged greater defiance in Greece. When
the May elections failed to deliver a governing coalition, Greek citizens gave
27 percent of their votes in June’s follow-up election to Syriza, which established
itself as the leading opposition party.

Amidst this people’s rebellion, a technocratic interlude of
some importance transpired. Everyone agreed that
governments that lived beyond their means needed to tighten their belts.
Therefore, the debate was not about whether to implement fiscal austerity, but
rather about how quickly to tighten the belt. In October 2012, the IMF’s
Blanchard and his colleague Daniel Leigh gave a clear answer: not too quickly
in the midst of a recession.

The
caution on excessive and too-rapid austerity rested on a number known as the
fiscal multiplier. Blanchard and Leigh estimated that if the economy was
already weak and a government cut spending (or raised taxes) by a euro, GDP
would fall by nearly two euros; thus, the fiscal multiplier during a recession
was close to 2.0 and not 0.5 as the IMF had previously assumed.
Quite simply, Blanchard and Leigh were saying that in the condi­tions
prevailing then, aggressive austerity was causing GDP and, hence, tax revenues
to fall far too rapidly, and so, paradoxically, austerity was increasing the
burden of repaying debt; it was causing the debt-to-GDP ratio to rise.
Virtually every published research study agreed with the Blanchard-Leigh
analysis and recommendations. Yet, despite the overwhelming
scholarly evidence, European authorities reacted furiously to the
Blanchard-Leigh estimate of the fiscal multiplier.

Yet,
despite the overwhelming scholarly evidence, European authorities reacted
furiously to the Blanchard-Leigh estimate of the fiscal multiplier. The
estimate could not be correct, they said, because they knew that austerity did
not cause a slowdown in growth. To the contrary, they claimed that fiscal
restraint by governments helped instill confidence that taxes would be lower in
the future and that such confidence encouraged investment and growth. European
politicians and technocrats insinuated that Blanchard and Leigh had improperly
used the prestige of the IMF to question the deeply held European belief that
austerity was always an honorable undertaking. Despite the overwhelming scholarly evidence, European authorities reacted
furiously to the Blanchard-Leigh estimate of the fiscal multiplier.

The most
remarkable expression of this conviction was an angry let­ter, dated February
2, 2013, and posted some days later on the European Commission’s website.
Addressing European finance ministers, European Commission vice president Olli
Rehn said that not only was the Blanchard-Leigh research wrong, it had
certainly “not been helpful.”

Those who were not in European policy and
intellectual inner cir­cles gasped in disbelief. Soon the Rehn letter became
the object of ridicule. “No debate please, we’re Europeans,” was the title of a particularly tren­chant critique authored by
Jonathan Portes, director of a London-based think tank, the National Institute
of Economic and Social Research. “It just seems bizarre,” Portes wrote, that
Rehn should be trying to muzzle a “theoretically based and empirically
grounded” academic paper on a subject of great con­temporary importance.

Meanwhile, Syriza steadily gained ground while economic
conditions remained bleak. By December 2014, it
appeared that Syriza, with its promise to lighten the burden of austerity, was
on its way to a parliamentary victory. German finance minister Schäuble relayed
a warning from Berlin: “New elections change nothing.”
The
Greek gov­ernment, he said, echoing Asmussen from nearly three years earlier,
must stick to the program in place.

On January 25, 2015, Greek citizens responded
by electing Syriza to power with a comfortable parliamentary majority. Tsipras
became prime minister with a mandate to negotiate debt relief and dial down the
austerity. European leaders – fiery advocates of democratic ideals – were
aghast at the Greek people’s revolt against policies dictated from Berlin,
Brussels, and Frankfurt. The interna­tional media faithfully echoed dire
predictions for Greece’s fate. European leaders – fiery advocates of democratic ideals – were
aghast at the Greek people’s revolt against policies dictated from Berlin,
Brussels, and Frankfurt.

“It’s
a take-it-or-leave-it offer,” once again

As in all economic matters during the Greek crisis, the
received wisdom was clear. To forgive debt is twice-blessed. The debtor’s
burden is reduced and the creditor gains because the debtor is now more
reliably able to service the remaining debt and is a better counterpart for
transactions in the future. The wisdom goes back at least to John Maynard
Keynes, who in 1919 had argued for canceling
Germany’s debts and limiting the war reparations owed to the victorious Allied
governments. Enforcing those payments would impover­ish Germany, Keynes said,
in which case, he famously warned, “vengeance, I dare say, will not limp.”
Among contemporaries, U.S. president Barack Obama said to CNN’s Fareed Zakaria
that it was wrong “to squeeze more and more out of a population that is hurting
worse and worse.” Jeffrey Sachs, Columbia University economist and sovereign
debt specialist, was a Syriza advisor and advocate.

Stripped of drama, Syriza’s demand was simple: debt relief,
which would allow less austerity. This demand had overwhelming support in both
the scholarly economics literature and the practice of economic policy. Finance
minister Yanis Varoufakis’s specific proposal was that Greece would repay its
debt by a formula linked to GDP: debt servicing would be greater when Greek GDP
was growing faster. This would allow less austerity, especially in slow-growth
phases.

To be sure, the frenzy
at the moment was great. Syriza’s leaders were impatient; European leaders were
horrorstruck. European authorities and the IMF held all the cards, and it would
have done them great credit to recall Arendt’s cautionary words: “To hold
different opinions and to be aware that other people think differently on the
same issue shields us from Godlike certainty which stops all discussion and
reduces social relationships to an ant heap.” The Greek people had made an
eminently sensible plea. Was anyone accountable to them? True democratic
leaders would have recognized in that moment a need to deliberate and reach a
sensible compromise. The Greek people had made an
eminently sensible plea. Was anyone accountable to them?

But European authorities
never allowed a conversation around the core imperative of reducing Greece’s debt
burden. Syriza formed a government on January 25, 2015. On January 31, Erkki
Liikanen, governor of Finland’s central bank and, in that capacity, a member of
the ECB’s Governing Council, threatened that the ECB would stop funding Greek
banks if the Greek government did not agree to the terms of the creditors. And
on February 4, the ECB decided Greece’s fate. In an aggressive move that took
everyone by surprise, the ECB cut off funding to Greek banks, preemptively
immobilizing the Greek government before it could begin negotiations with its
creditors. The ECB withdrew an earlier arrangement under which Greek banks used
their government bonds as collateral (security) to obtain funds for running
their day-to-day operations. Although Greek government bonds had a junk rating
and normally only higher-rated bonds qualified as collateral, the ECB had
waived that requirement to help the banks stay afloat. With its February 4
decision, the ECB revoked that waiver. Greek banks could now borrow only from
the Greek central bank under an Emergency Liquidity Arrangement (ELA); ELA
funds carried a higher interest rate and, moreover, could be turned off at any
time, thus choking the Greek financial system.

Stock prices of Greek
banks fell sharply, and two days later, the rating agency S&P pushed the
government bonds’ rating further into junk territory. With continuing deposit
flight from Greek banks and the threat of a financial meltdown, the Syriza
government rapidly lost all leverage before it could use its economic argument
in a political negotiation.

Only the unpredictable Juncker, by now
European Commission president, had a moment of clarity. On February 18, he
said, “We have sinned against the dig­nity of the people of Greece, Portugal,
and sometimes Ireland.” He added, “Everything that’s called austerity policy is
not necessarily austerity policy. Because often those austerity policies end up
being excessive.” Previously, as Luxembourg’s finance minister, Juncker had
himself been part of the col­lective creditors’ decisions on the Greek program.
Recalling his complicity in the formulation and enforcement of the policies he
was now criticizing, Juncker added, “I seem stupid for saying this, but we need
to learn lessons from the past and not repeat the same mistakes.” He even
questioned the “democratic legitimacy” of European creditors and of the IMF in
their unac­countable rush to impose punitive policies. But Juncker’s
inexplicable truth-telling did not fit the accepted narrative. The mainstream
media ignored his statement. Juncker’s
inexplicable truth-telling did not fit the accepted narrative... The mainstream media ignored his statement.

Through
the first half of 2015, the IMF stood firmly on the side of the European
creditors. While the northern members of the ECB’s Governing Council – supported
by France’s Benoît Coeuré and President Mario Draghi – kept up threats of
halting disbursement of ELA funds to Greek banks, the IMF added to the pressure
on Greece. It did so by remaining silent on the mat­ter of debt relief and by
reinforcing the demand that the Greek government achieve a primary budget
surplus (a surplus net of interest payments) of 4.5 percent of GDP, insisting
especially and repeatedly on wage and pen­sion cuts. Thus, despite the internal
warning by Blanchard and Leigh, the IMF’s April 2015 projections foresaw the
Greek primary surplus reaching 4.5 percent of
GDP by 2016 and remaining near that
extraordinary level as far as the projection horizon. Coming on top of the
unprecedented austerity, such further demand for belt-tightening would have strangled
the Greek economy.

The IMF’s
management was acting, as it often does, in step with its major shareholders’
preferences. Obama could have restrained the IMF. But despite having talked a
good game, he was unwilling to lend his political weight to the Greeks. The
German position held sway over the IMF’s manage­ment and board. Obama
could have restrained the IMF. But despite having talked a good game, he was
unwilling to lend his political weight to the Greeks.

It was my position in
those months that the Greek government be
called on to maintain a primary budget surplus of 0.5 percent of GDP and nearly
all of Greek debt be written off so that in three years, with its extremely low
debt burden, the government could be ready to borrow from private lenders on
debt contracts that allowed for automatic debt restructuring upon reaching
clearly defined stress triggers. Such debt contracts would limit the incentive
to borrow and lend. None of this, however, was politically feasible.

On June
25, five months after Syriza came to power, Varoufakis brought up the question
of debt relief again at a meeting of European finance ministers. Repeatedly
rebuffed by the ministers, he turned to the IMF’s managing director Christine Lagarde,
who also attended these meetings. Varoufakis said, “I have a question for
Christine: Can the IMF for­mally state in this meeting that this proposal we
are being asked to sign will make the Greek debt sustainable?” Lagarde knew the
answer to that ques­tion. In an analysis just
completed, IMF staff had concluded that without
substantial debt relief, the Greek government’s debt would remain “unsus­tainable”;
the government would never be able to repay its debts. But before Lagarde could
respond, Dutch finance minister Jeroen Dijsselbloem told Varoufakis, “It is a
take it or leave it offer, Yanis.” It was always take it or leave it: in May
2010 and June 2015.

In the
late evening of June 25, Tsipras announced that on July 5, Greek citizens would
vote in a referendum whether to accept the creditors’ terms. On Saturday
morning, June 27, eurozone “partners,” as they called themselves, assembled in
Brussels to deny Greece extension of the financial assistance program due to
expire on Tuesday. Depositors in Greek banks panicked and began withdrawing
their money. On Sunday, as cash machines ran dry, the ECB froze the level of
ELA that the Greek central bank could provide its banks. The panic escalated,
and the government imposed controls on the amount of cash withdrawals. Greek
banks would not open on Monday morning.

On
Thursday, July 2, the IMF’s report, which made clear that the Greek government’s
debt was unsustainable, was leaked. Thus, Greek citizens went into the
referendum knowing that their government could not repay its debts and, facing
limits on how much money they could withdraw, they could foresee that a no vote
would entail months of hardship.

Yet, on
July 5, 61 percent of Greeks voted oxi,
a resounding no. In fact, a student said she had voted “Oxi, oxi, oxi.” “What you have heard,” she exclaimed, “is the voice
of the people, the rage of the gods.” According to one estimate, 85 percent of
those between the ages of eighteen and twenty-four voted oxi. A student who had just completed her master’s degree said, “I have
absolutely no chance of work; basically, I am being told to emigrate.” “What
you have heard,” she exclaimed, “is the voice of the people, the rage of the
gods.”

Historians
will debate whether Tsipras was foolish or naïve in calling the referendum. But
it did give the Greek people one more chance of saying they had not been heard
and no one was accountable to them. We will never know what might have happened
had Tsipras followed the people’s mandate and rejected the European demands. He
chose to return to the European fold and the Greek economy continued to muddle
through to its exit.

Greece
needs debt relief so that the economy can grow again

Upon its “exit,” the
Greek government is required to maintain a primary surplus of 3.5 percent of
GDP through 2022. The required primary surplus will decline after 2022, but
will average 2.2 percent a year until 2060. Debt relief by European creditors
will be tied to the achievement of these surpluses.

The IMF has since July
2015 been an advocate of Greek debt relief, as long as Greece pays back the
debt it owes to the IMF. The IMF, which not so long ago insisted on a 4.5
percent of GDP surplus, now emphasizes that maintaining even a 3.5 percent of
GDP surplus requires the Greek government to “severely compress” investment in the
country’s future.

Thus, if the government
does attempt to maintain the European primary surplus targets, those surpluses
will help pay down debt immediately, but because economic growth will fall, the
debt burden, in the IMF’s words, will “follow an explosive path over the longer
term.” Conclusion: Greece needs substantial debt relief now along with more
modest primary surplus and GDP growth targets. Conclusion:
Greece needs substantial debt relief now along with more modest primary surplus
and GDP growth targets.

With a straight face, the
IMF says it “has consistently argued that Greece can reasonably be expected to
sustain a long-run primary surplus of no more than 1.5 percent of GDP and
annual real GDP growth of around 1 percent, and that even achieving these
outcomes will require Greece to undertake profound structural reform over time.”

I have good reason to
stick by my earlier insistence that the Greek primary surplus be no more than
0.5 percent of GDP. In a brilliant new paper, two IMF
economists provide extensive documentation of what has long been known:
extended periods of economic stagnation leave the economy deeply weakened,
leading to “permanent output losses.”

Greece is the poster child
of such an analysis. For nearly a decade, Greece has cut back on investment in
human and physical capital. But there is more. The Greek population is rapidly
aging. Between 2020 and 2060, Greece’s working-age population will decline by
35 percent! Meanwhile, discouraged by bleak prospects at home, the best and
brightest are leaving to seek their fortunes elsewhere. Left without its best people,
the traditionally low Greek productivity growth could fall to abysmally low
rates. Fiscal pressures will increase as fewer working-age people support the
elderly, which means that the best people will continue to leave. Greece needs a
Marshall Plan-style investment program to reverse this treacherous economic
descent.

Who
is accountable to the people of Greece?

I have written this
essay not to point out the repeated failures of European and IMF policymakers
to learn from their mistakes. That story is generally known. For the IMF, its
own Internal Evaluation Office has just produced another damning report. Rather, I
have highlighted and emphasized that key decision makers were made well aware
of the “mistakes” they were committing before
they made their decisions. They, however, felt free to disregard any advice or evidence
that did not suit their purpose—and they defined their purpose purely as the
protection of what they saw as their own self-interest.

The structure of the
eurozone, despite soothing words like “solidarity,” creates vast imbalances in
economic power. Those enjoying the upper hand have no reason to explain their
actions. It is always “take it or leave it,” “it is not on the table,” or
“elections don’t change anything.”

Thus, the Greek story is
not a story of unfortunate technocratic errors. And it is not just about what
went wrong in Greece, grim though that is. Rather, it is about a colossal
failure of accountability in international governance. Mechanisms of
international governance are presumed to rely on benign, technically sound decision-making
bodies. That presumption, however, is far removed from reality. Politics
operates unchecked in the rarified technocratic realm within which
international actors operate. And since the international media are deeply
beholden to the prominent and glamorous international actors, all contrary
voices are caricatured and dismissed. The Greek
story… is about a colossal failure of accountability in international
governance.

The IMF sits at the
pinnacle of international governance. More so than any other international agency,
the IMF, with its command over vast resources at moments of raging financial
crises, exercises an almost mystical authority. Given the grievous consequences
of undermining an IMF rescue operation, the IMF is almost always insulated from
public criticism while the crisis is ongoing. And the IMF dutifully issues mea culpas, which – more than in other
bureaucratic organizations – are candid documents. But here is the rub: the IMF
commits the same errors again and again. In the Greek program, the errors were
repeated within the course of the long operation even though the evidence was
there to behold.

For this reason, given
the delusional austerity required by the IMF and European lenders in Greece, it
is only right that the IMF forgive Greek debt. Not just to compensate Greek
citizens but equally to hold itself accountable and, hopefully, prevent such
gross negligence in the future. Greece still owes the IMF $9 billion. The
amount to be forgiven is, therefore, small in relation to total Greek debt but
is sizeable enough to acknowledge the IMF’s accountability.

I recognize that the IMF
will require the concurrence of its Board, and European authorities could
assemble a coalition to nix the idea. But at least the Europeans will be forced
to defend their position before their international peers. Perhaps, European
governments will be shamed into more rapid debt forgiveness, which would allow the
Greek government greater autonomy in decision-making.

To the Greeks, the
promise was that joining the European Community in 1981 would safeguard their fragile
democracy. We will never know what might otherwise have happened. Mercifully,
Greece has not returned to dictatorship. That, however, can be small
consolation to Greek citizens who have suffered decades of indignity inflicted first
by their own leaders and then more insidiously by European politicians and
technocrats in Berlin, Brussels, Frankfurt, and Washington.

Up until the second half
of the twentieth century, colonialism meant occupation, like British rule of
India. Over the decades, that form of colonialism ebbed worldwide. It was soon
replaced, however, by a creeping economic colonialism, justified as necessary
to harness the benefits of integration. Powerful corporations and nations
dictated an increasingly wider range of economic policies to weaker countries.
The European handling of the Greek crisis takes economic colonialism to a twenty-first-century
high-water mark.

I suspect that in my
lifetime, the Greek parliament will continue to rubber stamp decisions made in
Berlin, Frankfurt, and Brussels. Greeks will continue to live in a colony with
their economic life administered by the European Union. The likes of French
president Emmanuel Macron and his admirers will continue to sing the virtues of
an idealistic “European sovereignty.” That the
euro, touted as essential to overcome the memories of Europe’s disastrous wars,
should lead to modern economic colonialism is shocking – but to those who have
followed the history of this project, it should not be a surprise.

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